Why Greece can’t leave the Euro

In his Blog The Conscience of a Liberal and in his weekly New York Times column, Paul Krugman shares his thoughts about the dilemma Greece faces as a result of its economic crisis. Briefly, Krugman detects four possible scenarios in response to the Greek crisis:

Scenarios in which Greece will stick to the Euro

a) Greece will go the hard way of cutting wages and expenditures in order to become competitive again,
b) the European Central Bank will support Greece by introducing a more expansionary policy, thus accepting a higher inflation,
c) stronger European governments (Germany in particular) will aid Greece with financial support and

Scenario in which Greece will leave the Euro

d) Greece will default on its debts, leave the Euro, fight possible bank runs by imposing restrictions on withdrawals and regain competitiveness by devaluating its new currency.

Although Krugman recognizes that the latter solution “will send shock waves through Europe”, he argues that this is the only politically plausible alternative. He also stresses the many similarities to Argentina 2001.

However, the one thing that significantly differentiates Greece from Argentina is its membership in (and thus influence on) the Eurozone and the EU. Leaving Greece alone is definitely not bearable for the EU, because this would equal the ultimate confession of failure. If one of the alternatives has to be selected as the most implausible, it is certainly scenario d).

If Greece defaults on its debts and/or leaves the Euro, it will not only risk massive bank runs, but it will for sure also drag Portugal down in the abyss. Markets would start to panic in other European countries – Spain, Ireland, UK to be mentioned – and the entire European (finance) system would collapse like a house of cards. From a European point of view (including non-Euro Greece), this pretty much equals the economic apocalypse.

Krugmans colleague Joseph Stiglitz seems to favor alternative c) – European government support for Greece – and urges Germany to overcome the public sentiment against helping Greece. I unfortunately have to verify that most Germans don’t feel a moral obligation to help Greece. Especially the German boulevard (particularly “Bild”, Germany’s largest and most influential newspaper) has created a very strong anti-Greece sentiment among the German population.

Personally, I’m also reserved towards helping Greece, but I think it’s necessary in order to keep the EU alive. I am convinced that alternatives a-c) (or a policy mix of them?) are much better and by far more politically plausible than seeing Greece leave the Euro.
Like Stiglitz suggests, I’d also welcome any institutional reforms – especially a solid European fiscal framework – to overcome the Euro’s weaknesses.

By the way, the Greece public sector is way too “fat”. In Germany, 11% of the working population are employed in the public sector. According to German news magazine Spiegel, the corresponding number for Greece is approx. 22%. “Real” public servants account for 12% of those number, the other 10% are temporarily employed by the Greece Government. Citing a Greece friend and, again, the Spiegel, those 10% do all the work while the “real” public servants just sit, relax and receive their paycheck for doing nothing. Greece has to cuts expenditures anyway, why not start here?


German Federal Statistical Office: Employment in the Public Sector in Germany [German]
Jessen, Corinna: Verschwendung im Schuldenstaat: Griechen wüten gegen die Prass-Wirtschaft [German]
Krugman, Paul: Greek End Game, published 05/05/2010 in his blog The Conscience of a Liberal
Krugman, Paul: A Money Too Far, published 05/07/2010 on page A27 in the New York Times
Stiglitz, Joseph E.: Can the Euro be saved?

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